CalSTRS Recommends Private Equity Boost

Staff at the California State Teachers’ Retirement
System (CalSTRS) presented the fund’s investment committee
with a proposal that would increase the current portfolio
allocation and introduce procedural changes that would make
such investments easier. The category currently represents
less than 5% of the fund’s commitment to alternative
investments, mostly in Funds or with groups well-known to
CalSTRS.

CalSTRS believes that the category has the potential to
increase returns for the $116+ billion fund, as well as
offering reduced risk for an investor with CalSTRS
investment expertise.

Un-Limited Potential?

Limited partnerships are very illiquid securities,
typically with ten-year terms, and not traded in public
markets, according to the proposal. The secondary market is
often the only option for investors desiring to liquidate
their investments in limited partnerships prior to the
scheduled expiration date.

The committee believes that the illiquidity of the
market, coupled with the liquidity needs of sellers creates
an opportunity to invest in the secondary market at this
time, noting that:

Many investors are at or beyond their approved
allocations to private equity and may be looking to scale
back that investment

the secondary market can facilitate changes to
existing private equity investments, or provide new
investors to achieve better diversification in those
portfolios

limited partners may want to free up capital to make
commitments to new limited partnerships

Market volatility may send some investors in search
of liquidity

Many investors new to the sector may re-evaluate
their commitment to private equity and may seek to divest
holdings

Mergers and acquisitions activity may create blended
interests that need to be separated

The proposal will be considered at the CalSTRS
investment committee meeting on April 4.

CalSTRS posted a whopping 78.6% return on its private
equity portfolio in the year to June 2000, and an average
annual return of 41.6% over the last three years according
to Reuters.

Separately, CalSTRS reported it has allocated 5% of its
total assets for real-estate investments, to both diversify
and provide stable cash flow.